China said to consider slowing or halting purchases of US Treasuries

China said to consider slowing or halting purchases of US Treasuries

China also fixes its exchange rate against the dollar, so its buying and selling of dollar assets is largely aimed at managing the value of its currency.

That's given U.S. 10-year yields a push once again, as it jumps to day's high of 2.5715%.

"If China ceases to be a net purchaser of U.S. Treasuries, this is unlikely to have a significant impact on the overall yield curve unless China divests a large share of its total holdings in a short time period", said Rajiv Biswas, Singapore-based chief Asia-Pacific economist at IHS Markit.

China uses its holdings of foreign currency bonds to keep its currency at the rate where it wants it, and given this desire for stability, there might not be much room for maneuver on the composition of its reserves.

"If the reports turn out to be true and China no longer sees Treasuries as an attractive option, the repercussions could be significant", says Craig Erlam, senior market strategist at OANDA, a currency trading firm with offices in NY. That is not an outcome that would appear to be palatable politically or for economic reasons.

And China could get even tougher.

Ten-year German government debt, the benchmark for the euro area, was also on the backfoot, pushing yields higher by seven basis points to 0.54%, versus a 2017 high of 0.60%. The report suggests that China feels US debt is becoming less attractive when compared to other types of investments.

Wall Street experienced its first loss-making session this year, over reports of rising US-China tensions.

Malpass, who heads worldwide affairs for Treasury, also reiterated his concerns about China's emphasis on its state-owned enterprises and government subsidies that distort capital allocation. "The U.S. and China trade policy is a legit risk in 2018".

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Major government bond yields extended earlier gains after the report.

The administration is considering several new tariff moves in the coming weeks, including broad restrictions on steel and aluminum imports and punitive actions against China arising from an investigation into Beijing's intellectual property practices.

What does this all mean for Treasury yields?

Wall Street's major indexes have pared some earlier losses as higher United States government bond yields drive gains for banks and other financial stocks.

The fear is that, at a time when the Federal Reserve has started reducing its holdings of US debt (coupled with news that Japan is reducing its Treasury purchases and China might follow suit), there will be less demand for USA debt.

The Fed has started shrinking its US$2.5 trillion Treasuries portfolio as it seeks to normalize monetary policy.

If China retreats, would other buyers step in?

Some investors saw a reduction of bond purchases by the Bank of Japan this week as a potential indication of this.

Treasuries benefit from their relative safety and liquidity compared with other assets.